In this quarter’s update, David Guiver, Andrew Hines and guest energy specialist, Lasanthi Weerasekara, look at the East Coast electricity markets, supply and demand in the large generation certificate market, and East Coast gas, with a focus on Queensland domestic prices.
Welcome to Shell Energy’s quarter one 2021 wholesale market update. Three topics to share with you this edition. East coast electricity markets, contract prices have reverted close to their norms around the $30 to $40 mark. We’ll take a look at the large generation certificate market, looking at the supply and demand. We’ve got some indication from new projects coming on. We’ll share some data there and also take a look at compliance from 2020 which also helps because it gives them insights. And lucky last, the East coast gas market really focusing on Queensland domestic prices how those gas prices compare with electricity prices and also how the international benchmark prices compare to those local prices. Taking us through the analysis this quarter will be Andrew and Lasanthi from the Shell Energy training team.
Thanks Dave. Hi, I’m Andrew Hines. One of the senior energy traders here at Shell Energy. In this review, we’re going back and re-looking at some data we’ve presented in previous reviews. On this chart, we’ll hear the history of the New South Wales based low futures contracts. Data here is the average end of day prices over each month going back to 2002. What we pointed out back in the Q4-19 review is that over the long-term, we see the contract prices generally reverted back to a sort of baseline price. In the case of new South Wales, this is around the $40 a megawatt hour mark. There are some excursions from these prices. The first event we see is back in 2007 which was driven by the droughts. In this case, it was limited generation capacity coming from the hydro units, as well as a lot of the coal-fired units. This drove higher spot prices, and in turn, we saw an increase in contract prices. This event, however, was short-lived, mostly as the rains returned and the generating capacities moved back to more normal levels. And we saw contracts revert back to this baseline level. Moving further, the next big excursion we saw was around 2012, 2013 with the introduction of the carbon price. However, if we take out the carbon component of these contract prices, we can see that prices still remained around this $40 per megawatt hour baseline level. Pushing a bit further, the next steep rise in contract prices occurred after the announcement of the retirement of the Hazelwood power station in Victoria. With this amount of capacity coming out of the market, we saw a steep rise in contract prices. This event was much more sustained as we saw prices continues to stay at these higher levels as we saw this representative to sustain change in the generation mix in the NEM. Back when we first presented this analysis, we were right in the middle of this higher price regime. Recently, we’ve seen contract prices begin to fall again and are heading back towards this reversion level around that $40 mark, but we’re still not there yet. Looking at the Queensland contracts, it’s a similar story there where we’ve seen the similar impacts of these various events. The Queensland contracts did however take more of a sharper fall and have moved more quickly back to their sort of baseline reversion level, which is a bit lower than new South Wales sitting at around $30 a megawatt hour. Looking at the Victorian contracts, they too have a lower sort of baseline level. Similarly around that $30 per megawatt hour mark. The retirement of Hazelwood had a much bigger impact in Victoria and we see that the rising contract prices was much more dramatic and in much higher levels. Despite a much sharper rise, we’ve now seen contract prices begin to fall again in Victoria and start heading towards that baseline level around the $30 a megawatt hour. One thing to note is that we see in new South Wales, the fin year 24 contract is trading above the early years in year 22 and 23 which isn’t the case in Victoria and Queensland. This higher price in the fin year 24 in new South Wales is due to the forecast closure of the Liddell power station.
Focusing in the more recent months, we can see that after the fall in contract prices, they began to stabilize a bit through 2020. However, more recently we began seeing further falls in the contract prices as they continue to head back towards these baseline levels. So why are we seeing this fall in contract prices? Well, over the past year, we’ve seen spot prices continue to fall from the high prices we saw following the Hazelwood shutdown. The biggest impact has come from the change in the generation mix across a NEM. To delve into the details is Lasanthi.
Thanks Andrew. This graph compares the change in generation across the NEM between Q1 2020 and Q1 2021. As you can see the volume of generation coming from black coal and gas has decreased quite substantially. At the same time, the volume of generation coming from renewables, wind and solar has increased quite a lot. On the other hand, we can see that brown coal actually managed to increase its generation compared to last year. The downturn in gas generation is actually quite significant. This is because gas represents a much lower percentage of the NEM’s capacity compared to black coal. Ultimately increasing renewable generation coupled with low demand brought about by a mild of summer this year has led to significantly lower spot price outcomes this quarter relative to last year.
Thanks for that analysis Lasanthi. Now we’re moving on to the environmental certificates. In this section where we take a look at the environmental schemes, we’re going to revisit our analysis of the Cal 2020 Glasgow renewable energy certificate target now that the surrender date is passed. Back in Q3 2020, the forecast numbers indicated an overhang of just over a million certificates compared to the previous year where we had an overhang of about seven and a half million certificates. This was primarily due to an increase in the volume of voluntary surrender certificates, as well as a decrease in creation volumes throughout the year. Updating the numbers past the surrender date, we see that the trend of decreasing creation volumes continued into Q4 20 where the volume rate was down by about million certificates compared to where it was forecast to be in Q3. However, this was countered by significant short surrender volume of approximately 6.8 million certificates.
This meant the overhang volume coming into Cal 21 was at eight and a half million certificates, more than a million certificates higher than the volume we saw coming into Cal 20. The liability target has now flat-lined where it had been increasing up until Cal 20. While the target is flat-lining, we’re seeing an increase in the supply of LGCs as more and more renewable generation capacity comes online. What the chart on the left shows is both the committed and the proposed capacity of renewable generation that will be coming into the market. The chart on the right shows a history of four certificate prices for Cal 22, 23 and 24. Moving out into latest surrender years, we can see that the process certificates is falling. This is because with the target remaining static, but more and more projects coming online, that there’ll be a greater supply of certificates. Hence, we’re seeing the value of certificates in later years being lower.
So in summary, following the Cal 2020 surrender, we can see that we have a much larger overhang of certificates compared to Cal 19 due to the significant volume of short surrender. We’re now moving onto gas where we’re going to revisit the analysis we looked at in the last quarterly review? Here we’re looking at the Wallumbilla gas hub price which is an index for the Queensland domestic gas price and the ACCC LNG netback price which gives us an indication of the international gas price. In this review, we’re gonna look at how this relationship coincides with the power price in terms of the Queensland spot electricity price. So the bars in this chart represent the average monthly Queensland spot price. What we’re going to talk about today are three different events that have impacted gas prices over the last couple of years. The first event we’re looking at is back in late June, 2018 where there was an unplanned outage of the long free storage facility in Victoria. This saw an increase in domestic gas prices. As it counts out over the higher demand for gas fired power generation with higher spot prices. Looking at the period from Q1 18 to Q1 19, we saw a steady increase in gas prices. This was in part driven by increased demand for gas by generation. As we saw an increase in the average spot prices. Following these events, we can see a steady decline in both gas prices and electricity prices as we saw less demand for gas by generation with a decreasing in Queensland spot prices.
In this last Q1, we saw a spike in the price of international gas. This is due to an increased demand for power generation in the Northern hemisphere due to extreme winter. However, domestically we’ve had quite a mild summer. So we’ve seen a very demand for gas fire generation with a low Queensland power price. This has meant that although international prices by domestic prices continued to fall. So we’ve seen a divergence between the international and the domestic price over Q1. So summing up, while we do see a relationship between domestic and international prices at times, local factors can have a much greater impact and this can drive a divergence between the two prices. Thanks for watching. I hope you found this information interesting and insightful. Back to you, Dave
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1 December 2021
In this quarter’s update, David Guiver, Andrew Hines, Lasanthi Weerasekara and Grant Shannon look at the power market and how renewable energy from large projects is influencing spot prices. They focus on the changes in supply and demand for environmental certificates and review the correlation between international and domestic prices in the gas market.
16 September 2021
In this quarter’s update, David Guiver, Andrew Hines, Lasanthi Weerasekara and a new guest, Lead Gas Trader Grant Shannon, look at the correlation between the power and gas markets. They also examine the composition of NEM power generation by fuel source and the impact of the Callide and Yallourn events.